V.7:3 (69-72): Tactical stock trading by Peter Eliason

V.7:3 (69-72): Tactical stock trading by Peter Eliason
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Tactical stock trading by Peter Eliason

We have all heard that there is no solution to predicting the market because price movement is a random walk. The statement is partially right and partially wrong. Price movement may be random, but there is an exact solution to a random walk that can be used to mathematically beat the markets.

The solution revolves around the use of a tempered martingale numerical series. This algorithm is not probabilistic, but it is mathematically exact. (See Stocks & Commodities, July 1988, page 40.) It has two components: a point spread that determines exactly when to buy and sell and a numerical series that determines how many shares to buy or sell to produce a pre-known gross profit.

We start with a beginning numerical series such as [1 2 3 4 5 6], with each number representing a "factorable" number of shares to own. The "factor" is multiplied times the number in the series to determine the number of shares which will be traded. For example, a factor of 100 would make the "5" in the series represent 500 shares.

Once we have the series, we need a "base price" which is usually just the price of the last buy, sell or no action transaction. We start by buying at the base price and set two limit orders a point spread above (a sell) and below (a buy) the base price. If a stock's price is $10 per share, the limit orders may be set at $9 or $11—or any other spread, for that matter.

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